Rising gold price offset by higher Aussie for local producers

A concurrent appreciation in the value of the Australian dollar will subdue the benefit for most gold miners producing locally.

The spot price for gold spiked in the hours after the Republican and Democrat parties in the United States struck a deal with interim measures to extend the nation’s debt limit and end a 16-day shutdown of non-essential public spending.

At 2pm AEST on Friday it was trading at $US1317.77 per ounce, up a whopping $US37 from $US1280.86 at Thursday’s local market close. Meanwhile, at 2pm AEST the Australian dollar was buying US96.28¢, up from at US95.39¢ at Thursday’s local market close.

“There is traditionally an inverse relationship between the value of gold and the US dollar," Citi equities analyst Daniel Seeney said. “But as the US dollar fell at the prospect of continued monetary stimulus by the Fed that drove the gold price higher."

CIMB head of commodity strategy Daniel Hynes said: “Thursday night’s spike in the gold price was unexpected...I actually expected a small fall.

“There had been a bit of safe-haven buying during the US government shutdown and debt stand-off so I expected to see gold sell-off a little now that has been resolved for the time being," he said.

With the immediate risk of a potential default by the US is gone, the fallout from the US political fracas of this month is likely to buoy the gold price over the coming weeks, Mr Hynes said.

“A government shutdown that dragged into a third week has negatively effected consumer sentiment in the US and for that reason it is now expected the Federal Reserve will push back the start-date for tapering stimulus.

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“Continuing current levels of quantitative easing should keep liquidity high and the US dollar week," Mr Hynes said. “But once the taper does start it will push interest rates higher, which traditionally puts pressure on the gold price."

CIMB expects the gold spot price to rise over the coming months to average $US1290 per ounce for 2014, with a lower average of $US1200 per ounce in 2014. “Physical global demand for gold remains strong but the macro-economic pressures on the price are significant," Mr Hynes said.

Citi’s global forecasts for the gold spot price are $US1405 per ounce by the end of 2013, falling to $US1250 per ounce in 2014, and rising to $US1350 per ounce in 2015, with a long-term forecast for $US1050 per ounce (in real terms).

Offshore producers to benefit most

“There are two main factors that drive the share prices of Australian gold stocks, the spot gold price and the value of the currency," Mr Seeney said. “The ideal scenario for companies operating gold mines in Australia is a rising gold price, accompanied by a falling dollar."

“For those goldminers with significant operations offshore, the value of the Australian dollar is less of an issue," Mr Seeney said.

“The stocks that are set to benefit the most from the higher gold price are the companies with the highest production costs," Mr Seeney said. “Companies that have been close to go going broke running off a very low vase will get a big multiplier effect on their cashflow."

Persueus Mining
is likely to be the biggest beneficiary of the gold price rising in tandem with a strengthening Australian dollar because it is a relatively high cost producer with 100 per cent of its production in West Africa, Mr Hynes said.

Resolute Mining
and
Kingsgate Consolidated
are two other gold stocks that have a majority of their production offshore and a relatively high cost of production, he said. Beadell Resources also has 100 per cent of its production offshore but has a lower relative cost of production.

While analysts covering Australia’s biggest goldminer
Newcrest Mining
are also concerned with internal company issues “gold and currency values remain the most important variables for the company’s outlook," Mr Seeney said. “Key for Newcrest is to generate more cash and stop increasing their debt, the price of gold and the value of the dollar are the two biggest variables in that strategy."

Mr Seeney’s preferred gold stock is
OceanaGold Corporation
. “OceanaGold is ramping up production at its project in the Philippines which is one of the lowest cost gold mines in the world." Citi’s target price on the stock is $2.50.